'Nicholas wants it': Macquarie Bank CEO's role in tax deal revealed

By Clancy Yeates, Volker Votsmeier & Soenke Iwersen

Updated28 September 2018 — 12:09pmfirst published at 10:30am

Macquarie Group chief executive Nicholas Moore and his successor, Shemara Wikramanayake, were involved in approving deals that are now at the centre of an investigation by German prosecutors into an alleged tax fraud scandal.

Mr Moore and Ms Wikramanayake are likely to be classified as "persons of interest" or "suspects" under German law, and interviewed by prosecutors over 2011 deals, making them the latest senior bankers to be embroiled in a multi-billion dollar scandal that has affected dozens of major banks internationally.

The explosive announcement comes as a cache of leaked documents shows Macquarie Bank’s board in 2010 approved a plan to lend about €3.3 billion to hedge funds that were planning to use a controversial strategy to exploit a quirk in German tax law, despite warnings of reputation and tax risks.

The documents leaked to German newspaper Handelsblatt, and shared with Fairfax Media, show top Macquarie executives, including Mr Moore and Ms Wikramanayake, were briefed on the plans in 2010.

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As part of a long-running probe, the Cologne Prosecutor's Office (CPO) is investigating Macquarie for "assistance to tax fraud" over a 2011 transaction in which Macquarie lent money to Irish hedge funds seeking to take advantage of complex German tax rules.

A separate civil action has alleged that parties involved in the specific plan which Macquarie helped to facilitate stood to make a combined "€462 million" in "unjustified tax benefits."

Following detailed questions about the trades from Handelsblatt and Fairfax Media on Thursday night, on Friday morning Macquarie told the ASX the CPO would want to interview up to 30 Macquarie staff involved in the transaction.

At the time of the deal Mr Moore was the chief executive of Macquarie Group and Ms Wikramanayake was in charge of Macquarie Funds Group, the division behind the transaction. Both executives are among those expected to be interviewed.

"In order to interview all these individuals, they are likely to be formally classified under German law as persons of interest or suspects," the bank said in a statement.

Macquarie said the amount of money involved with the CPO investigation was "not material." It has previously set aside about €100 million to repay profits gained from earlier "cum-ex" trading.

German prosecutors have for years been investigating banks, investors and brokers over a strategy known as "cum-ex" trading - a reference to the Latin phrase "with-without" - which effectively allowed multiple investors to simultaneously claim a tax credit off a single dividend.

Document trove

The leaked documents reveal how Macquarie's lending to funds using the controversial "cum-ex" trading strategy was approved by the highest rungs of the Sydney-based investment bank.

Macquarie's plan was devised by bankers in Europe including former head in Munich Axel von Rosen, working with legal advisers including Dr Hanno Berger, and Macquarie executive Peter Lucas. Mr von Rosen no longer works at Macquarie, while Mr Lucas is a senior executive in its asset management arm.

In late 2010, some of Macquarie’s legal advisers were telling the bank the German government was seeking to crack down on this type of trading, and financing the deals came with significant risks.

But Macquarie went ahead with financing the proposed trades in 2011 anyway, based on advice from other firms.

Nicholas Moore, our CEO wants the transaction and that’s why it will happen

Email from Axel von Rosen

In one leaked email from October 2010, Mr von Rosen wrote in German to Dr Berger.

"I’ve passed on your concerns to our Group Head, also to ramp up pressure internally. He just wrote me the below lines. Nicholas Moore, our CEO wants the transaction and that’s why it will happen," a translation of the email says.

The transaction that is being probed by the prosecutor took place in April 2011 and was the subject of different legal advice, which Macquarie says indicated the tactic was legal.

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A separate memo on the practice in September 2010 was written by Peter Lucas and addressed to Mr Moore, who will retire at the end of November, to be replaced by Ms Wikramanayake.

The briefing, titled “dividend arbitrage opportunities,” sets out the mechanics of the trades, noting they have a “high level of tax sensitivity."

In response to one internal paper, the head of Macquarie Securities Group, Roy Laidlaw, raised concerns about the fact Macquarie was prepared to lend to finance the trades rather than conduct them with its own money and also that the proposition had been brought to them by former Macquarie staff.

“Its [sic] clearly your call but it is a bit strange that we are financing trades that we cannot get comfortable with to do ourselves,” he wrote on October 7.

“Dealing with ex employees who we don’t trust and lost us over 100m.”

It is a bit strange that we are financing trades that we cannot get comfortable with to do ourselves

Roy Laidlaw

Later that month, in 2010, a joint memo from Ms Wikramanayake, Mr Lucas and Mr von Rosen and another executive was circulated to the Macquarie Bank board seeking approval to lend €3.3 billion to German dividend trading funds.

The memo said although the bank was advised its strategy was legal, there was a risk Macquarie was seen to participate “in a transaction that generates benefits due to tax attributes of dividends”.

The same memo estimated Macquarie's “base case” was that the deals would generate “net return on economic capital” of 304.7 per cent.

Board papers show Macquarie Bank's board approved the proposal on October 28, at a meeting that was also attended by Ms Wikramanayake, Mr Lucas, and executives Stephen Allen and Peter Holloway.

"The Board asked that management obtain an independent view of the reputation and political risks for Macquarie of entering into the transactions, from a respected German person/authority," the board papers say.

By December, staff in Macquarie had formed the view that planned deals with German funds were no longer viable after a proposed law change. Instead, bankers worked up a plan to finance Irish hedge funds using the same strategy.

It lent the money in 2011, but the Irish funds were not able to claim the tax credits as planned due to a crackdown by German authorities. On Friday Macquarie said it was one of more than 100 financial institutions involved in the market, and it believed it was acting lawfully.